Today, we are going to discuss the most important thing in your trading toolbox — market structure.
CMC Academy frequently explains different tools to help you improve your analysis and trading practices. Today, we are going to discuss the most important thing in your trading toolbox — market structure. Let's dive into it!
What Is Market Structure?
Market structure (MS) tells you the direction of the price of an asset using a zoomed-out view. Traders use it to analyze the behavior of price. Bullish, bearish and sideways/ranging are three main types of market structure. A series of consecutive swing lows and highs, also called swing points, are used to determine the type.
The chart below shows an example of identified swing points. A general belief is that a swing point (high or low) consists of a clear high or low, coupled with two more highs or lows. To practice it, pull up a chart and try to find a few swing points!
How Do I Identify the Market Structure?
Now that you know how to identify swing points, let’s look at the ways to understand the market structure. As discussed, market structure is defined by a series of consecutive swing points. When the price prints consecutive higher highs and higher lows, it is bullish. On the other hand, the market structure is bearish when consecutive lower highs and lower lows are printed.
The chart below shows a basic analysis of market structure. As you can see, an analysis considers the main turning points, rather than every single high and low. Practice and experience will teach you which areas to ignore and which areas to focus on. The point of analyzing market structure is to understand the overall direction of the market.
When there is an opposite picture (higher lows and lower highs at the same time, for example), the market is generally viewed as a ranging market. The chart below is a solid example, where no clear trend can be derived from the structure.
How to Use Market Structure in Trading
Market structure tells you the overall direction of the market. Understanding the trends can help you decide what positions to take, as shorting is generally easier in a downtrend. At the same time, longing is often easier in an uptrend.
However, traders make most profits/losses when the structure shifts. When a bullish market structure breaks and becomes bearish, a new trend is established. These trends tend to last for a while — therefore, spotting these shifts early can provide you with an excellent signal for a trade.
The chart below shows a simplified view of a market structure break. As you can see, the break takes place when the price exceeds the latest highs, confirming that it is now stronger than before. The higher low beforehand does not necessarily have to happen, but can be an early signal to start paying attention.
As with any indicator or analysis, this too can provide false signals, where a market structure break fails. When it happens, the previous trend often continues and can even accelerate.
Closing Statement
All in all, market structure is a very basic way to study price movements. It provides a clear picture of the trend direction, like moving averages do. The advantage of studying MS lies in the breaks, which often are confirmation of a reversal.
Market structure can be analyzed on all timeframes, and it can be different across time frames. For example, low-time frame MS can be bullish, even if the higher time frames are indicating a downtrend. A higher-time frame market structure is generally cleaner. Moreover, breaks in the these time frames are much more significant than in a low time frame.
Writer’s Disclaimer: This article is based on my limited knowledge. It is for educational purposes only and should never be construed as advice in any shape or form.
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